Pakistan’s central bank cleared the smoke on Tuesday as it injected liquidity at a higher interest rate into commercial banks ahead of its monetary policy review on July 7, signalling it would increase its key policy rate this week.
The State Bank of Pakistan (SBP) supplied Rs1.18 trillion to commercial banks at an increased interest rate of 13.97% for a longer period of 73 days through the open market operation (OMO).
It had left the financial markets surprised a day ago (Monday) when it sought commercial banks demand for liquidity, but rejected all bids worth Rs2 trillion.
The Monday’s exercise had confused the market, as it gave mixed signals about the uptick in key policy rate on July 7. But Tuesday’s 73-day injection “at a higher interest rate” suggested a hike in the policy rate when the central bank meets on Thursday to review its monetary policy for the next six weeks, AHL Research economist Sana Tawfik said while talking to The Express Tribune.
Financial institutions including Shariah-compliant banks had given huge demand for liquidity (Rs2 trillion) at rates in the range of 13.84% to 13.99% on Monday.
They came up with a reduced demand for liquidity (Rs1.37 trillion) at increased interest rates in the range of 13.87% to 14.07% on Tuesday. The central bank accepted bids worth Rs1.18 trillion at a rate of 13.97%.
“The interest rate (13.97%) at which bids are accepted stands higher compared to 13.83-13.86% in the previous OMO,” she said.
“Our research house view is that the central bank will increase the key policy rate by 100 basis points,” she said. The policy rate stands at 13.75%.
Meezan Bank SEVP and Head of Shariah Compliance Ahmed Ali Siddiqui said on Monday that the central bank rejected the bids after witnessing that the offered interest rate was low.
Ismail Iqbal Securities Head of Research Fahad Rauf said the policy rate was a tool available with the central bank to create balance between the inflation reading and economic growth.
The spike in inflation to a 13-year high at 21% in June came due to the hike in prices of petroleum products and electricity tariff. “In this scenario where inflation is the result of price hike instead of demand-driven, the hike in interest rate will remain ineffective and unnecessarily compromise economic growth.”
Published in The Express Tribune, July 6th, 2022.
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